Brexit: Are we facing a workforce crunch?

One good thing to come out of the Brexit vote (though some of you might dispute this) is that I’m getting invited to do more panel discussions and round tables. At a couple I have been to recently, senior executives from the hospitality industry have remarked that they are not only concerned about a skills shortage, they are worried about an overall labour shortage. They believe there will simply not be enough people to fill all their jobs.

The assumption that the UK will only need skilled migration after Brexit runs through much of the media discussion. That the Labour Party had even considered the option of work visas for unskilled migrants was greeted with hysterical headlines last week. Suggesting that the country might need unskilled migrants is treated as heresy. But if the UK were to apply the same skills and earnings criteria to EU migrants as it does to non-EU migrants, around 75 percent of those currently here would not qualify. Even if, as is likely, many of them stay after Brexit, over time, restrictions on migration would almost certainly lead to a shortage of labour.

Consultancy firm Mercer published a report earlier this year in which they modelled the various migration scenarios and the likely impact on workforce numbers. They based workforce participation rates on OBR projections, assuming that participation would increase among older workers as the state pension age rises. They then came up with four scenarios from 2020, based on net migration falling to 185,000, 150,000, 90,000 and going negative. The scenarios are explained here:

The likely impact of all four scenarios is a working population growing more slowly than the total population.

I put these figures on a chart to show how far the workforce declines as a percentage of the population under each scenario. For clarity, I’ve kept as close to Mercer’s colour scheme used above as I could.

The underlying problem here is that the UK-born workforce appears to have stopped growing. The number of UK-born in work is barely a quarter of a million more than at its pre-recession peak but its rate of employment is at a record high.

Even though the UK born employment rate is higher than it has been since the ONS started counting, almost all of the post-recession employment growth is accounted for by those born elsewhere. This suggests that there isn’t much extra capacity among those born in the UK. Sure, the quality of some of the jobs could be better and those on short or uncertain hours would benefit from more secure work but even this would not increase the capacity of the workforce by much. Without immigrants, the percentage of our population in work is likely to go into a steady decline.

Mercer’s 100,000s scenario is particularly interesting because it is closest to the Conservatives’ stated migration target, which, as Theresa May said last week, they aim to achieve by 2022. According to Mercer’s projections, population and workforce profile would change significantly over the next 15 years or so. With fewer migrants arriving and a large cohort of the UK-born population moving into retirement, the workforce would fall to around 49 percent of the population.

It would be possible to increase workforce participation by encouraging more over-65s to stay in work, by helping some inactive groups back into work and by relocating some activity to areas of higher unemployment but the fact that employment rates are already at an all time high suggests that there isn’t that much spare capacity available. We’d need some more creative ideas than we’ve come up with so far to get participation rates higher still.

It is likely that many of the jobs created since the recession would not exist were it not for the availability of migrant labour. According to the most recent ONS statistics, there has been no increase in the number of UK-born in employment over the last year. All the net increase in employment has been due to those born abroad. It is likely, then, that many employers will struggle if their labour supply is choked off and some may well go out of business.

Some will, no doubt, argue that this is a good thing and the UK should never have allowed this number of migrants into the UK in the first place. That’s as may be but they were and our economy has come to depend on them. Reducing their numbers by more than half over five years is likely to be extremely disruptive. An executive from a large manufacturing firm told me that they are more worried about a shortage of skills and labour than they are about increased friction and cost in their supply chain after Brexit.

Perhaps the labour shortage will shock companies into investing more in technology and training or in moving to areas where there are more workers available. However this would require a radical change in the UK’s short-termist buy-not-build business culture that has prevailed over the last few decades. It would also not happen overnight.

British employers are in for a labour shortage shock to add to the trade and uncertainty shocks that will come with Brexit. Managing it will be a huge task and one which, from my anecdotal observations, a lot of businesses haven’t yet understood and prepared for.

All of which leads me into a plug for a CIPD event in a couple of weeks time. Mercer are publishing an update to their report later this month and its author, Gary Simmons, a former colleague of mine, will be presenting the results. It promises to be a thought-provoking discussion and one that is likely to be of interest to many readers of this blog. It’s free to all CIPD members. There is a token charge for non members but it’s not much more than the price of a pint.

The event is at 6.30pm on 19 June, in the week of the Brexit vote anniversary, at the Lyric in Hammersmith. To book, follow the link below.

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